extra: the DEA boosts cartel profits!
by Diego Leiva
Published: May 3, 2008
Last week the feds announced that they had uncovered 5 Texas-based bus companies that used their human cargo as a front to funnel thousands of pounds of cocaine and marijuana into the U.S. from Mexico. If basic economic theory didn’t get in the way, we could mark this up as one more victory for the soldiers in the War on Drugs. Unfortunately, the only certain result from the broken distribution ring is an upward pressure on the street price of cocaine and marijuana. As a matter of fact, that’s exactly how the feds determine whether or not their policies are successful. They find out what the market is charging for the drug they’re targeting; a drop in the supply of a product will cause an increase in the price of that product (draw a graph). If supply is down it must mean that the feds are winning right? And if they’re winning, that must mean that the policy is correct, right?
Wrong.
Imagine a war on hamburgers. Let’s pretend that the HEA (Hamburger Enforcement Agency) was able to break up the Wendy’s-Carls Junior Hamburger Cartel. What would that do to supply? Well, duh, if you shut down Wendy’s & Carl’s Junior, the immediate impact is a reduction in the number of hamburgers in circulation. And what happens to hamburger consumers? Do millions of Wendy’s and Carl’s Junior aficionados swear off their #3s with extra pickles? No. A few might, yes, but not many.
It turns out that Burger King and McDonalds and the joint down the street are good substitutes for Wendy’s and Carls. Thus, the crackdown will lead to a scenario where you have too many hamburger demanders chasing too few hamburgers. At which point the only way to bring the hamburger market back into equilibrium is for suppliers to raise their prices. What does that mean for those firms still left in the market? They get to charge higher prices and make more profit; life is really good for them. Too good, it turns out. Because eventually a wily entrepreneur will take notice of the increased profits and decide to open up shop. The process repeats itself until all of the excess profits are erased by increased competition.
In other words, by focusing their efforts on suppliers, the HEA, or the DEA for that matter, creates a unending cycle where decreased supply leads to increased profits, which leads to increased supply. So why is the majority of drug enforcement focused on breaking up the supply chain? I’m not sure, but I do know that supply-side enforcement does wonders for job security within the DEA.
However, were the DEA to devote its resources to imprisoning drug consumers you would see the opposite result. Reduced demand for a product lowers prices, lower prices lead to lower profits. Firms respond to lower profits by exiting the market.
Not sure if that logic jives?
Well, what would happen to the joint down the street if the cops started arresting its patrons? It’s awfully hard to stay in business when the police keep throwing your customers in jail.
Now for those of you in favor of the War on Drugs, understand that the point of this article is not to make a case against it, but rather to point out the simple fact that, as currently waged, the War on Drugs is a complete sham.
P.S. I’m against the War on Drugs.
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May 14th, 2008 at 8:10 pm
Excellent article. You raised the targets, set them up, set them in your sights, and knocked ‘em down. I think your strongest point came at the #3 with extra pickles (I prefer #1’s myself) as a metaphor for addiction - No matter what the drug, if its addictive it will not be rendered nonexistent due to laws and the punitive measures that result from their violation.